Pay for Performance in Human Resources. Is it a Great Idea?

The pay for performance philosophy and concept is a leading reward approach in the current remuneration. No organization advertises it is not focused on the workforce performance. However, just a few ones are really performance driven. Nobody will argue that McKinsey is really performance driven. On the other hand, most people would say they would never work for such a company. They value different things in life more than the job, the success and the money. It is the same with the performance; it is always relative. We should also continuously consider the role of the business unit in the company (as it changes and fluctuates over the time). Maybe, the Human Resources Management function is not the best place to introduce the pay for performance approach.

What is the issue with Pay for Performance?

Most organizations do value the high performance of employees. However, they usually do not realize in a full picture what behavior and which competencies drive such a performance and productivity. They see the positive impact of top players, but they lack the complete picture. They usually use a simple trick. They announce that the company pays for performance. They also put it among their corporate values, because they believe that it will have a profoundly positive impact on the overall morale in the organization.

Those organizations usually do not focus on the link between the performance and remuneration systems in the business. It is a difficult task to make such a clear relationship between my regular job and the amount I see on my monthly salary slip. The compensation strategy usually lacks the component that supports me in my daily and continuous effort to reach higher limits. Also, come on, I am not talking about the annual bonus.

As leaders and managers, we always consider that our remuneration practices support and stimulate the high performance of employees. We pay annual bonuses and we reward the small extra delivery by providing immediate extras likes dinners, vouchers and assigning better scores in performance appraisal discussions. Maybe, we just introduced a corporate culture where employees expect us to pay for any small extra they do for the company. Is this pay for performance?

We do not have a business where employees are highly motivated and engaged. We have a business where we pay for things other companies do not have to. Who would not like to work for such a company that pays for things and situation where others say “Thank You.”

Let us be honest. We usually say that we reward the performance when sales results are booming. Everyone has the right expectation that the annual bonus will be higher than the last one. Employees in Sales Force expect their sales incentives and provisions to be rising. It works till the moment of the first troubles quarter. Then, the story changes and nobody talks about the performance anymore. All talks are just about excuses why they did not meet targets.

Where the concept works best?

No doubt, the pay for performance methodology can bring tremendous results in Sales and Operations functions. Employees usually expect that the actual productivity will directly influence their compensation. It is a market standard. It is quite rare to see a Call Center where operators do not have a simple set of KPIs that helps navigate them during phone conversations with clients. They know what products they should offer because they carry the highest commission.

Why does it work in Sales and Call Centers so great? Because you can define targets and you can describe all processes and procedures. You do not expect employees to invent new approaches daily; you expect them to do the job. Also, everyone has the same assignment. You do not have to judge which sold unit is better because they all sell the same product.

individual performance can be measured and cannot be influenced by other internal factors;

the company can introduce effective control and risk management framework;

employees can directly change the result by adjusting their actions;

employees can easily compete with others in the team;

employees can see an almost instant translation of results into financial rewards.

In summary, there is one bold and straightforward driving idea behind the scheme, that employees love setting challenging targets, and they value the financial recognition most. Additionally, the company has to offer products that sell well. The company can set a minimum performance standard required, and it can pay the incentive for the delivery above the threshold.

In general, the concept works best for business functions where employees perform the same job. All call center operators have the same position, and they understand how they can influence individual results. The same applies to all salespersons. They know how they should do the job, and they use incentives as their navigator what delivers the best results.

Pay for Performance in Human Resources (and other support functions)

There is the issue in Human Resources. Employees do not have the same job and their days differ. Managers of the enabling function struggle to list all responsibilities and tasks of subordinates. They cannot put a simple scheme in place that rewards just a small fraction of all deliverables. It could break the rules of fair treatment of all team members. Some team members would have a high chance to earn an additional income, and others would be left with tasks no one is willing to do.

Let us be honest, how do you define a high performance in Human Resources? Would you measure it by the number of contracts produced? Would you measure it by the number of employees hired and fired? High performance in HR is usually seen through the influence on our internal clients. It is difficult to measure it regularly. It is about the variety in our jobs and how we can combine different tasks and approaches to influence our clients most.

In Human Resources, our days are colorful. We cannot write the exact and definite list of all the tasks we will finish today or tomorrow. Employees and managers influence our priorities strongly. One phone call can change priorities to the entire HR team because there can be something important and urgent. Moreover, none of it is reflected in our job descriptions.

Most introduction of the pay for performance concept introductions to support functions fail because they prefer the repetitive operational tasks over challenging priorities.

Still, the concept can be introduced if the management team makes essential changes:

divides the team into the operational and strategic subteams;

defines clear performance criteria for guys in the operational subteam;

introduces clear procedures on how to evaluate the performance;

introduces the control and risk framework to avoid any personal failures.

Again, if the team can make such difficult changes, it has to evaluate the opportunity to outsource such tasks. These jobs are usually concentrated in the HR Back Office Team, and their duties can be transferred to the external provider of such services. This provider can introduce the right pay for performance because it runs just the repetitive and operational tasks for its clients.

So, how to reward challenging and project-based tasks?

Each change in the remuneration scheme changes the behavior of employees. However, we usually cannot predict the change in behavior correctly. It is not us who defines how we play the game. We provide the rules and basic guidelines. However, employees find the way how they will play the game to achieve the best results with the minimum energy investment.

We should never join the challenge and the financial reward together. As we cannot foresee results, we cannot predict how employees will behave. By giving them the financial carrot, we can receive results we did not expect.

We should be brave and have the courage to express that the company will value the result, but we cannot say right now, how we will reward employees in the team. We can promise that there will be a fair award, but it will depend on the quality of the final delivery.

We forget that cheating is common. Sometimes, we introduce the pay for cheating instead of pay for performance.